Editors: IBFD. Visitors address: Rietlandpark DW Amsterdam The Netherlands. Postal address: P.O. Box HE Amsterdam The Netherlands

Transcription

1 DOING BUSINESS IN TURKEY 2018

2 Editors: Africa: Ridha Hamzaoui, Emily Muyaa Asia-Pacific: Mei-June Soo, Nina Umar Caribbean: Priscilla Lachman, Sandy van Thol Europe: Larisa Gerzova, Adrián Grant Hap, Ivana Kireta, Magdalena Olejnicka, Andreas Perdelwitz, Marnix Schellekens, Kristina Trouch, Ruxandra Vlasceanu Middle East: Ridha Hamzaoui Latin America: Vanessa Arruda Ferreira, Maria Bocachica, Diana Calderón Manrique, Lydia Ogazón Juárez North America: John Rienstra, Julie Rogers-Glabush IBFD Visitors address: Rietlandpark DW Amsterdam The Netherlands Postal address: P.O. Box HE Amsterdam The Netherlands Tel.: IBFD All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written prior permission of the publisher. Applications for permission to reproduce all or part of this publication should be directed to: permissions@ibfd.org. Disclaimer This publication has been carefully compiled by IBFD and/or its author, but no representation is made or warranty given (either express or implied) as to the completeness or accuracy of the information it contains. IBFD and/or the author are not liable for the information in this publication or any decision or consequence based on the use of it. IBFD and/or the author will not be liable for any direct or consequential damages arising from the use of the information contained in this publication. However, IBFD will be liable for damages that are the result of an intentional act (opzet) or gross negligence (grove schuld) on IBFD s part. In no event shall IBFD s total liability exceed the price of the ordered product. The information contained in this publication is not intended to be an advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. Where photocopying of parts of this publication is permitted under article 16B of the 1912 Copyright Act jo. the Decree of 20 June 1974, Stb. 351, as amended by the Decree of 23 August 1985, Stb. 471, and article 17 of the 1912 Copyright Act, legally due fees must be paid to Stichting Reprorecht (P.O. Box 882, 1180 AW Amstelveen). Where the use of parts of this publication for the purpose of anthologies, readers and other compilations (article 16 of the 1912 Copyright Act) is concerned, one should address the publisher.

3 DOING BUSINESS IN ARGENTINA TURKEY JANUARY

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5 DOING BUSINESS IN TURKEY 2018 INTRODUCTION This publication has been prepared by the International Bureau of Fiscal Documentation (IBFD) on behalf of BDO, its clients and prospective clients. Its aim is to provide the essential background information on the taxation aspects of setting up and running a business in this country. It is of use to anyone who is thinking of establishing a business in this country as a separate entity, as a branch of a foreign company or as a subsidiary of an existing foreign company. It also covers the essential background tax information for individuals considering coming to work or live permanently in this country. This publication covers the most common forms of business entity and the taxation aspects of running or working for such a business. For individual taxpayers, the important taxes to which individuals are likely to be subject are dealt with in some detail. We have endeavoured to include the most important issues, but it is not feasible to discuss every subject in comprehensive detail within this format. If you would like to know more, please contact the BDO firm(s) with which you normally deal. Your adviser will be able to provide you with information on any further issues and on the impact of any legislation and developments subsequent to the date mentioned at the heading of each chapter. About BDO BDO is an international network of public accounting, tax and advisory firms which perform professional services under the name of BDO. The global fee income of BDO firms, including the members of their exclusive alliances, was US$8.1 billion in These firms have representation in 162 countries and territories, with over 73,800 people working out of 1,500 offices worldwide. BDO s brand promise is to be the leader for exceptional client service - always, and everywhere. When you choose to work with BDO you quickly discover why we re different from the rest. BDO offers a comprehensive collection of high quality tax services and assets designed to support exceptional performance, and all our tax engagements benefit from the hands-on involvement of experienced professionals, backed by world-class resources. We are agile enough to handle the biggest and the smallest names in the industries we serve, and our relationship-driven culture means that we can provide responsive and personalised advice to all our clients. We work hard to understand our clients businesses and ensure that we match both our service offering and our people to their complex individual needs. We believe that providing our clients with access to experienced professionals who are actively engaged in addressing their tax and business issues is the most reliable way to provide exceptional service, always with a strong focus on trust and transparency. Regardless of your location, size or international ambitions we can provide effective support as you expand into new areas of the world. In an ever-evolving economic environment, businesses need a global organisation that provides exceptional, bespoke service combined with local knowledge and expertise. BDO is uniquely positioned to serve this demand, providing effective support and a truly global integrated global footprint. 3

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7 DOING BUSINESS IN TURKEY 2018 TABLE OF CONTENTS CORPORATE TAXATION... 9 ABBREVIATIONS... 9 INTRODUCTION CORPORATE INCOME TAX TYPE OF TAX SYSTEM TAXABLE PERSONS Residence TAXABLE INCOME General Exempt income Deductions Depreciation and amortization Reserves and provisions Inflation adjustment reserves Replacement reserves Risk capital reserves CAPITAL GAINS LOSSES Ordinary losses Capital losses RATES Income and capital gains Withholding taxes on domestic payments Dividends Interest Royalties Other INCENTIVES Investment incentives Rate reductions Subsidy for employers social security contributions Subsidy for income withholding taxes Stamp duty and real estate tax relief Research and development Allowance Exempt salaries Patent box regime Customs-free zones Notional interest deduction Regional headquarters Small and medium-sized enterprises ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings TRANSACTIONS BETWEEN RESIDENT COMPANIES GROUP TREATMENT INTERCOMPANY DIVIDENDS OTHER TAXES ON INCOME

8 DOING BUSINESS IN TURKEY 2018 TABLE OF CONTENTS 4. TAXES ON PAYROLL PAYROLL TAX SOCIAL SECURITY CONTRIBUTIONS TAXES ON CAPITAL NET WORTH TAX REAL ESTATE TAX INTERNATIONAL ASPECTS RESIDENT COMPANIES Foreign income and capital gains General Dividends Profits of permanent establishments Other Foreign losses Foreign capital Double taxation relief NON-RESIDENT COMPANIES Taxes on income and capital gains Taxes on capital Administration WITHHOLDING TAXES ON PAYMENTS TO NON-RESIDENT COMPANIES Dividends Interest Royalties Other Withholding tax rates chart ANTI-AVOIDANCE GENERAL TRANSFER PRICING THIN CAPITALIZATION CONTROLLED FOREIGN COMPANY VALUE ADDED TAX GENERAL TAXABLE PERSONS TAXABLE EVENTS TAXABLE AMOUNT RATES EXEMPTIONS NON-RESIDENTS MISCELLANEOUS TAXES CAPITAL DUTY TRANSFER TAX Immovable property Shares, bonds and other securities STAMP DUTY CUSTOMS DUTY EXCISE DUTY INDIVIDUAL TAXATION ABBREVIATIONS INTRODUCTION INDIVIDUAL INCOME TAX TAXABLE PERSONS

9 TABLE OF CONTENTS DOING BUSINESS IN TURKEY TAXABLE INCOME General Exempt income EMPLOYMENT INCOME Salary Benefits in kind Pension income Directors remuneration BUSINESS AND PROFESSIONAL INCOME INVESTMENT INCOME CAPITAL GAINS PERSONAL DEDUCTIONS, ALLOWANCES AND CREDITS Deductions Allowances Credits LOSSES RATES Income and capital gains Withholding taxes Wages Dividends Interest Other ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings OTHER TAXES ON INCOME SOCIAL SECURITY CONTRIBUTIONS TAXES ON CAPITAL NET WEALTH TAX REAL ESTATE TAX INHERITANCE AND GIFT TAXES TAXABLE PERSONS TAXABLE BASE PERSONAL ALLOWANCES RATES DOUBLE TAXATION RELIEF INTERNATIONAL ASPECTS RESIDENT INDIVIDUALS Foreign income and capital gains Foreign capital Double taxation relief EXPATRIATE INDIVIDUALS NON-RESIDENT INDIVIDUALS Taxes on income and capital gains Taxes on capital Inheritance and gift taxes Administration KEY FEATURES

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11 CORPORATE TAXATION DOING BUSINESS IN TURKEY 2018 TURKEY This chapter is based on information available up to 20 January Abbreviations Abbreviation English definition Turkish definition BKK Karari Governmental Decree Bakanlar Kurulu Karari DVK Stamp Duty Law Damga Vergisi Kanunu EVK Real Estate Tax Law Emlak Vergisi Kanunu GVK Income Tax Law Gelir Vergisi Kanunu HK Deed Fee Law Harçlar Kanunu KDVK Value Added Tax Law Katma Deger Vergisi Kanunu KVK Corporate Income Tax Law Kurumlar Vergisi Kanunu SGK Social Security and General Health Insurance Law Sosyal Sigortalar ve Genel Saglik Sigortasi Kanunu Teb. Announcement of the Ministry of Maliye Bakanligi Tebligi Finance VUK Tax Procedure Law Vergi Usul Kanunu Introduction Companies are subject to corporate income tax and withholding taxes. Employers must make social security contributions. VAT and stamp duties are also levied. The currency is the Turkish lira (TRY). 1. Corporate Income Tax 1.1. Type of tax system The Turkish corporate tax system is a two-tier system. First, corporate profits are subject to corporate income tax. Second, if the company distributes its profits to any individual shareholder or to a non-resident corporate shareholder, the dividends are subject to a withholding tax payable by the distributor of dividends. The taxable base for the withholding tax is calculated differently from that for corporate income tax. Therefore, income not subject to corporate income tax may be subject to withholding tax. Dividends received by corporate shareholders are exempt from corporate income tax. Alleviation of economic double taxation is provided for dividends received by resident individuals in the form of a full withholding tax credit. In addition, 50% of the gross dividends is exempt from income tax; the remaining 50% is taxed at the normal income tax rates, with a tax credit equal to the full withholding tax Taxable persons The following entities are subject to corporate income tax (article 1 of the KVK): (1) corporations (AS); (2) limited liability companies (Ltd S); (3) partnerships limited by shares; (4) cooperatives; 9

12 DOING BUSINESS IN TURKEY 2018 CORPORATE TAXATION (5) commercial and industrial enterprises owned and operated by public authorities, associations and foundations; and (6) investment funds established according to the Capital Market Act. Joint ventures, whose partners include at least one corporate taxpayer listed in (1) to (4) above have the right to choose between being subject to corporate tax or being treated as transparent entities for tax purposes. General partnerships and limited partnerships are treated as transparent for tax purposes (articles 1 and 37 of the GVK). This survey is limited to resident corporations and limited liability companies mentioned in (1) and (2), as well as to non-resident entities of a similar description. These entities will be referred to as companies Residence A company is resident if it has either, or both, its legal seat or place of effective management in Turkey (article 3 of the KVK). The concept of corporate seat refers to the place indicated in the company s formation document. The place of effective management refers to the place where the top management of the company is situated. For non-resident companies, see section Taxable income General Resident companies are subject to unlimited tax liability, i.e. they are subject to taxation on their worldwide income (article 3/1 of the KVK). All income and capital gains derived by companies from all types of commercial and industrial activities constitute business income. Basically, taxable business income is calculated as the difference between the value of the net assets on the last day and on the first day of the calendar year (net worth comparison) Exempt income In general, all income is subject to corporate income tax. The most important exception, however, is for dividends received from resident companies (participation exemption). For exempt foreign income, see section Deductions Expenses incurred in acquiring and maintaining business income are generally deductible (article 40 of the GVK). Start up costs may be fully deducted in the year they are incurred or depreciated over 5 years. Interest and royalties paid at arm s length are generally deductible (articles 11 and 13 of the KVK). However, interest and foreign exchange costs paid for a loan used to finance an investment project must be capitalized and depreciated over the investment period. Interest incurred after the investment period may be capitalized or deducted directly. With effect from 1 January 2013, a limitation applies to the deductibility of financing expenses where a company s debt exceeds its equity (article 11 of the KVK). In these situations, up to 10% (the exact percentage is determined by the Council of Ministers) of the financing expenses related to the difference between the debt and the equity is not deductible. Certain entities, such as credit institutions, financial institutions, financial leasing, factoring and finance companies are excluded from this limitation. The Council of Ministers has, however, not yet used its authority 10

13 CORPORATE TAXATION DOING BUSINESS IN TURKEY 2018 to actually set a limit (i.e. no limitation currently applies). Royalties paid for the use of copyrights, patents, trademarks and know-how are not directly deductible but may be depreciated (see section ). Deductions for doubtful debts are only allowed in the year in which the lawsuit is opened against the debtor. Discounts on receivables are deductible at the discount rates announced by the central bank. However, discounts on notes receivable may only be deducted if the notes payable are also revalued at the same discount rate (resulting in a gain). Donations are deductible up to 5% of the gross profits of the year if made to (article 10 of the KVK): public bodies; associations recognized by the Council of Ministers as serving a public benefit; tax-exempt trusts established under the Civil Code; and scientific research and development institutions. However, the following donations may be deducted without the 5% overall limitation: donations to official bodies for facilities related to education and rehabilitation; donations for facilities related to history, culture and art; donations related to natural disasters, for which the Council of Ministers has issued an aid decision; donations to the Turkish Red Crescent Association and the Turkish Green Crescent Society; donations to amateur sport bodies; 50% of donations to professional sport bodies; and donations for the construction of religious places and youth centres and camps which belong to the Ministry of Youth and Sports. In addition to the above, the following deductions are available: 10% of the taxable income for investment in Turkish venture capital funds, see section ; 50% of the business profits for resident companies supplying engineering, architecture, design, software, medical reporting, accounting, call centre, product testing, certification, data storage, data processing and analysing services in Turkey to non-resident persons, provided that such services are exclusively utilized abroad; and 50% of the business profits for resident companies supplying educational and medical services under the supervision and control of the relevant ministry to nonresident persons. With effect from 1 July 2015, a notional interest deduction applies (see section ) Depreciation and amortization Depreciation is allowed on both tangible and intangible fixed assets. Undeveloped land cannot be depreciated. Companies may adjust the book value of their depreciable fixed assets, buildings and land for inflation and calculate the depreciation on the basis of these new values (see section ). 11

14 DOING BUSINESS IN TURKEY 2018 CORPORATE TAXATION The two accepted depreciation methods are the straight-line method and the declining-balance method (articles 315 and repeated. 315 of the VUK). There are also special rules in respect of depreciation of mines and extraordinary depreciation. Assets of minor value can be expensed directly. In the case of straight-line depreciation, the rate is determined by the Ministry of Finance (article 315 of the VUK), such as for plants, buildings, agricultural land varying between 2% and 10%; and for machinery and equipment between 6.66% and 50% (Teb. 333 of the VUK). The taxpayer may not elect the depreciation period. Thus, for example, if a rate of 10% is determined by the Ministry, the asset is written off at the end of the 10th year. Taxpayers starting with the straight-line depreciation method may not change over to the declining-balance method in the subsequent years. Assets purchased before 1 January 2004 remain subject to the former depreciation rules, under which, inter alia, the taxpayer had the right to freely determine the rate up to 20%. The rates for land and buildings and for those items which were subject to a rate higher than 20% were determined by the Ministry. In the case of declining-balance depreciation, the taxpayer may take twice the straight-line rate (article rep. 315 of the VUK). The upper limit for the decliningbalance depreciation rate, however, is 50%. The period during which the decliningbalance method is applied is the same as the number of years which applies to the straight-line depreciation period. In the last year, the residue is written off. A taxpayer who has initially chosen the declining-balance method for an asset may later elect the straight-line method. In this case, the written-down value may be spread over the remaining years and be equally depreciated in these years. Intangible property, such as copyrights, patents and trademarks, are depreciated according to the general rules. The straight-line depreciation rate for such intangibles is 6.66%. Goodwill is depreciated in 5 years in equal amounts Reserves and provisions Inflation adjustment reserves The values of assets are adjusted according to inflation correction provisions in order to correct the value losses on assets caused by inflation and to assure that the financial statements reflect the actual value of assets of an enterprise. Where the increase in the production price index determined by the State Statistics Institute has exceeded 100% in the last 3 years and 10% in the relevant taxable period, financial statements are subject to an inflation adjustment at the end of the year (article rep. 298 of the VUK). If both conditions are met, the adjustment is compulsory. In general, the values of fixed assets and inventory, i.e. non-financial items, are adjusted. The accumulated depreciation may also be adjusted correspondingly. Financial items, such as national or foreign currency, debt claims and liabilities, and foreign exchange assets and liabilities are not adjusted. The share capital, however, is considered to be a non-financial item and may be adjusted correspondingly. For the adjustment of the value of an asset, the historic value is multiplied by a correction ratio, i.e. the ratio between the production price index of the month in which the asset is purchased or entered in the books as an asset and of the month in which the adjustment is made. For the adjustment of the share capital, the ratio is determined by reference to the date on which the capital is actually paid in. 12

15 CORPORATE TAXATION DOING BUSINESS IN TURKEY 2018 The differences between the asset values must be kept in special reserve accounts and their final balance must be transferred to the profit and loss statement of the year. Those accounts related to equity capital, however, may be used to increase the share capital or may be credited against losses without any tax consequences Replacement reserves Where the renewal of depreciable assets is necessary for the continuation of activities, amounts realized on the sale of the assets can be allocated to a replacement reserve (article 328 of the VUK). The replacement asset must be acquired within 3 years; otherwise, the reserve must be included in the taxable income of the third year. The 3- year period begins from the calendar year following the year in which the sale of the asset is realized. If a new asset is acquired during this period, its depreciation allowances are credited against the replacement reserve Risk capital reserves Companies are entitled to reserve up to 10% of their income to invest in approved Turkish venture capital investment partnerships or funds (article 325A of the VUK). The reserve may, however, not exceed 20% of the equity capital. Also, the amounts added to the reserve must be allocated to such a venture capital fund in the year in which those amounts are set aside. If, during that year, such reserves are, inter alia, transferred to other accounts, withdrawn in cash or unused, they are taxable in that year Capital gains Capital gains are generally regarded as ordinary income for corporate income tax purposes (article 6 of the KVK and article 37 of the GVK). However, where a resident company realizes a capital gain on the sale of participation shares, founders shares, preferred shares and priority rights in another company, 75% of such a gain is exempt from corporate income tax. In cases where a resident company realizes a capital gain on the sale of immovable property, 50% of such a gain is exempt from corporate income tax. In both cases, the following conditions apply (article 5/1c of the KVK): such participation shares or immovable property has been held for at least 2 years; the consideration for the sale is received within 2 years from the sale; and the total amount of the gain is kept in a special reserve account for at least 5 years. If such reserves are transferred to other accounts or withdrawn in cash or the company is liquidated within those 5 years, or the consideration for the sale is not collected within 2 years, the capital gain becomes taxable in that year and a tax loss penalty is applied. Companies engaged in trading in, or leasing of, immovable property or participation shares are not entitled to this exemption. Capital gains derived by companies from sale-lease-buy-back transactions (both financial and asset leases) are exempt from corporate income tax. Capital gains derived by leasing companies from the resale of such property to the lessee at the end of the leasing period are also exempt. The total amount of those gains is kept in a special reserve account by the lessee and credited against the depreciation amounts of that property (article 5/1j of the KVK). Capital gains derived by resident companies from the disposal of shares of resident corporations quoted on the Istanbul Stock Exchange are subject to a zero-rate withholding tax if such shares are acquired on or after 1 January 2006 and held for 1 year 13

16 DOING BUSINESS IN TURKEY 2018 CORPORATE TAXATION or less (temporary article 67 of the GVK). Gains from transactions effected on the forwards and options exchange are subject to a zero-rate withholding tax. Gains arising from the disposal of government and private bonds are subject to a 10% withholding tax (temporary article 67 of the GVK). This tax is applied by banks, stockbrokers and other intermediaries in respect of sales for which they have acted as an intermediary. For non-resident companies, see sections and Gains on the following securities are not subject to withholding tax but are included in the taxable income subject to corporate income tax at the general rate (temporary article 67 of the GVK) (see section ): shares and other capital market instruments, such as profit/loss certificates, acquired before 1 January 2006; bonds and debentures issued before 1 January 2006; certificates of investment funds (at least 51% of the portfolio must be made of shares quoted on the Istanbul Stock Exchange) if held for more than 1 year; securities issued by the Turkish Treasury abroad; shares of resident companies quoted on the Istanbul Stock Exchange if held for more than 1 year; and non-quoted shares. The taxable base for the withholding tax is the difference between the sale price and the purchase price. Quarterly pooling of sales of the same type of securities and other capital market instruments is possible. Losses generated from the sale of the same type of securities or other capital market instruments can be carried forward and deducted from the taxable base in the subsequent quarters, but cannot be carried forward to the following calendar year. For a resident company, the tax withheld is credited against its final corporate income tax liability Losses Ordinary losses As mentioned in section , the taxable income of a corporate taxpayer is defined as the increase of net assets between the closing balance sheet and the opening balance sheet in a taxable period. Any negative balance in this respect will be considered as a loss. Losses, whether domestic or foreign, are deductible in determining taxable income. Losses incurred from exempt activities, however, are not deductible from other (nonexempt) income. Net operating losses may be carried forward for 5 years (article 9 of the KVK). The loss must be covered by the first available year s income. There is no indexation of losses that are carried forward. Losses may only be carried back in the case of liquidation Capital losses Capital losses are treated as ordinary losses Rates Income and capital gains With effect from 1 January 2018, the rate of corporate income tax will be 22% for 3 years (Law 7061). Before 2018, the rate was 20% (article 32 of the KVK). 14

17 CORPORATE TAXATION DOING BUSINESS IN TURKEY 2018 For the reduced corporate income tax rate, see section Withholding taxes on domestic payments Dividends Dividends distributed by resident companies to other resident companies are not subject to withholding tax. Note that such dividends are also exempt from corporate income tax (participation exemption) in the hands of the receiving company. For withholding tax on dividends paid to non-resident companies, see section Interest Withholding tax rates applied to interest payments to resident companies are as follows (BKK Karari 09/14594): A rate of 0% applies to (BKK Karari 09/14594): interest on Turkish government bonds and debentures issued before 1 January 2006; interest on Turkish government bonds and debentures issued on or after 1 January 2006 (including those issued abroad); and interest on bonds and debentures issued by companies (if received through banks or intermediary institutions). A rate of 15% applies to income from repo transactions concerning Turkish government bonds and debentures (BKK Karari 09/14594). If interest income derived from debentures is received by resident companies directly from the issuing companies (i.e. not through banks or intermediary institutions), such interest income is subject to 10% withholding tax. Interest income derived by resident companies from debentures issued by resident companies abroad is, however, subject to different income withholding tax rates depending on the maturity date of such debentures. The withholding tax rates are as follows (BKK Karari 11/1854): Interest on debentures Rate (%) Up to 1-year maturity 10 Between 1-year and 3-year maturity 7 Between 3-year and 5-year maturity 3 Between 5-year and longer maturity 0 With effect from 2 January 2013, interest income on: deposit accounts (except interest paid between resident banks); profit shares received from interest-free loans; and profit shares received from profit/loss partnership certificates is subject to different income withholding tax rates depending on the maturity date of such accounts. Previously, such interest income was subject to a single 15% withholding tax rate. Current withholding tax rates are as follows (BKK Karari 12/4116): Maturity Rate (%) Up to (and including) 6-month maturity 15 Up to (and including) 1-year maturity 12 Longer maturity 10 15

18 DOING BUSINESS IN TURKEY 2018 CORPORATE TAXATION Where the interest income is derived from foreign currency accounts, the withholding tax rates are set at 18%, 15% and 13%, respectively (BKK Karari 12/4116). For a resident company, the tax withheld is credited against its final corporate income tax liability. For withholding tax on interest paid to non-resident companies, see section Royalties There is no withholding tax on royalties paid to resident companies. For withholding tax on royalties paid to non-resident companies, see section Other Periodical payments made to resident companies for construction and repair projects that continue for more than a year are subject to withholding tax at a rate of 3% (BKK Karari 09/14594). The tax withheld is credited against the final corporate income tax liability. For withholding tax on certain capital gains, see section Incentives Investment incentives A wide range of incentives, such as customs duty exemptions, corporate income rate reductions, VAT exemptions for machinery and equipment, and subsidies for the employers social security contributions are available. Non-resident investors benefit from the same incentives as resident investors. Normally investors must obtain an investment document from the Ministry of Economy in order to benefit from the incentives. Incentives are granted according to the geographic location (qualifying regions), specifications and value and type of investment (BKK Karari 12/3305). The six qualifying regions (Regions I to VI) are determined according to their degree of economic development, e.g. the first region includes the most developed cities of Istanbul, Ankara, Antalya, Eskisehir, Kocaeli, Mugla, Izmir and Bursa. Qualifying regional sectors with respect to business activities and products are specified. In addition, business activities that will not be granted incentives, or be granted incentives under specific conditions, are also listed. The minimum required investment value is TRY 1 million for the first and second region, and TRY 500,000 for the other regions. For investments carried out by way of financial leasing, however, the minimum investment is TRY 200,000. In addition, different minimum investment values and capacity requirements for strategic and large investments over TRY 50 billion and for regional investments in respect of different business activities and sectors are provided. With effect from 26 November 2016, investment incentives may also be granted to special projects by the Ministry of Economy. To qualify for this project-based incentive, a minimum fixed investment of USD 100 million is required Rate reductions Income arising from qualifying investments is subject to reduced corporate income tax rates, while the relevant tax savings are capped by a specified investment subsidy (article 32A of the KVK). Expenditures for land, royalties, spare parts and other expenditures not subject to depreciation are not eligible for the rate reduction. 16

19 CORPORATE TAXATION DOING BUSINESS IN TURKEY 2018 Joint ventures and finance and insurance companies do not qualify for the reduced corporate income tax rate. No reduction is applicable for withholding taxes. The applicable investment subsidy amounts and the corporate income tax rate reductions for qualifying investments are as follows (BKK Karari 12/3305): Region Investment subsidy (%) Rate reduction (%) I II III IV V VI For large investments, the following reductions apply: Region Investment subsidy (%) Rate reduction (%) I II III IV V VI For strategic investments in all regions, the applicable investment subsidy amount is 50% and the corporate income tax rate reduction is 90% (BKK Karari 12/3305). The tax reduction for fixed investments which qualify as priority investments (such as investments in sea and air transportation, railway, wind tunnels and international trade fairs) and amount to at least TRY 1 billion, is determined by adding 10 percentage points (i.e. 10%) to the investment subsidy rate applicable in region V. For example, the income from a qualifying large investment project of TRY 100 million, commencing in the first region, will be taxed at the rate of 10%, instead of the normal rate of 20%. The tax savings for that investment are capped at the rate of 25% (investment subsidy) to TRY 25 million. If a similar company invests in the sixth region under the same conditions, the applicable corporate income tax rate will be 2% until the tax savings amount to TRY 60 million Subsidy for employers social security contributions The Treasury will pay part of the employers social security contributions corresponding to the minimum annual wage amount, for the following periods (BKK Karari 12/3305): Region I II III IV V VI Period 2 years 3 years 5 years 6 years 7 years 10 years 17

20 DOING BUSINESS IN TURKEY 2018 CORPORATE TAXATION For strategic investments, the social security contribution subsidy is applied for 10 years in the sixth region. For the other regions a period of 7 years applies (BKK Karari 12/3305). In regions I to V, the total subsidy for employers social security contributions may not exceed the amount calculated by the following ratios of investment value (% of the investment) (BKK Karari 12/3305): Region Regional investments Large investments I 10 3 II 15 5 III 20 8 IV V For strategic investments, the total subsidy for employers social security contribution may not exceed 15% of the investment value in the above regions Subsidy for income withholding taxes Companies making investments in the sixth region do not have to remit all the income withholding taxes on employees salaries to the tax office (BKK Karari 12/3305). The part of the taxes that corresponds to the taxes calculated on the minimum wage does not have to be remitted. In cases where the investments are realized by 31 December 2023, companies may apply the incentive for a period of 10 years from the commencement date of the investment Stamp duty and real estate tax relief With effect from 9 August 2016, all types of documents related to investments subject to the investment incentive regime are exempt from stamp duty and deed fees, including transfers and documents related to fixed assets, royalties, construction and supervisory and technical services. In addition, buildings constructed within the framework of the incentive regime are exempt from real estate tax for 5 years. Land is also exempt from real estate tax during the investment period Research and development Allowance A research and development allowance, granted for new technology and information activities, is a deductible item for corporate income tax purposes. It is calculated as 100% of research and development expenses realized in a year. Where the corporate profits are insufficient for this allowance, the exceeding amounts can be carried forward and deducted from the taxable base in the subsequent years. Research and development expenses are also subject to depreciation if a fixed asset is created. Software and research and development activities of companies established in technological development zones founded by the Council of Ministers are exempt from corporate income tax until 31 December In cases where the tax-exempt income is derived from the alienation or leasing of intangibles, a patent or equivalent certificate (utility model certificate, design registration certificate, copyright registration certificate, integrated circuit topography, etc.) is required. Income from software activities may also benefit from the exemption if a copyright registration 18

21 CORPORATE TAXATION DOING BUSINESS IN TURKEY 2018 certificate is acquired. Taxpayers with income derived from intangibles not exceeding TRY 30 million (and net sales revenue of TRY 200 million), however, may benefit from the tax exemption without any patent or equivalent certificate (BKK Karari 17/10821) Exempt salaries Under research and development (R&D) and designing incentives applicable from 1 April 2008 to 31 December 2023, a part of the salary of an R&D and designing centre s personnel is exempt from individual income tax as follows (article 3 of Law 5746): 95% for R&D personnel having a PhD (or master s degree in science); 90% for R&D personnel having a (non-science) master s degree or an undergraduate degree from a science college; and 80% for other R&D personnel. The R&D centres founded as separate units of resident companies and permanent establishments of non-resident companies may qualify for the incentives. They are required to carry on their R&D activities exclusively in Turkey and to have at least 15 employees (or 30 for certain sectors such as the manufacturing of motor vehicles etc.). In addition, separate companies conducting R&D projects supported by public bodies, trusts or international funds also benefit from the incentives. For the purposes of the incentives, design activities include industrial activities and cinema, video, television programming and producing, expert designing and activities supporting visual arts. Effective from 1 September 2016, salaries of the personnel working outside of the R&D centres are exempt from income withholding tax provided that their work is related to the R&D projects and covers laboratory, analysis, testing, field research and scientific activities Patent box regime With effect from 1 January 2015, resident and non-resident companies may benefit from a patent box regime that applies to income from industrial property rights (article 5B of the KVK). Under this regime, 50% of the income (as defined, see below) derived from inventions developed as a result of R&D, innovation and software activities performed in Turkey is exempt from corporate income tax. Qualifying income comprises: income and revenue obtained from leasing, transfer or sale, or marketing through mass production in Turkey; and earnings generated through the sale of the products (produced in Turkey) to the extent these are attributable to the patent or the invention subject to a utility model certificate. The exemption applies only to inventions protected by a patent or utility model certificate, and commences from the date of the registration of the patent or the utility model certificate. Taxpayers who benefit from the patent box regime may not simultaneously enjoy other research and development incentives Customs-free zones Customs-free zones are areas established within Turkey but are deemed to be outside of Turkey. All types of commercial, industrial, banking and certain service activities are allowed in such zones. Companies operating in the these zones are generally exempt from all taxation and are not subject to other requirements, such as levies, customs and foreign exchange obligations. The corporate and income tax exemptions applied to companies established in customs-free zones were abolished as of 6 February 2004; 19

22 DOING BUSINESS IN TURKEY 2018 CORPORATE TAXATION however, they continue to apply for companies and branches with a valid operating licence acquired before 6 February 2004 until the date indicated on that licence. Profits arising from the sale of goods produced in such zones are exempt until Turkey becomes a member of the European Union. Income acquired by business enterprises engaged in maintenance and repair, assembly, dismantling, handling, unbundling, packaging, labelling and testing activities as well as storage services are also exempt until Turkey becomes a member of the European Union, provided that (i) such services are rendered to non-residents having their legal seat, place of effective management and permanent establishment abroad; and (ii) the products related to those services are exported to a foreign country without entering Turkey from the customs-free zones. With effect from 24 February 2017, income taxes withheld by companies operating in customs-free zones on salary payments are not paid to the Treasury by those companies, provided that the company exports at least 85% of its goods produced in the customs-free zone. Previously, such salaries were exempt from income withholding tax, i.e. the beneficiary of the incentive was the employee. All transactions conducted and documents produced in customs-free zones are exempt from stamp duties and fees until Turkey becomes a member of the European Union Notional interest deduction With effect from 1 July 2015, a notional interest deduction applies (article 10 of the KVK). Accordingly, 50% of the interest amount calculated over: the cash increases of the paid-in capital of existing capital companies; and cash capital contributions of newly established capital companies is deductible from the corporate tax base. For the application of the deduction, the annual weighted average interest rate applied to Turkish commercial loans provided by banks (announced annually by the Central Bank of Turkey) is used. If certain conditions are met, for publicly held companies and companies holding an investment incentive certificate (see section ), the maximum notional interest deduction is (i) 75% or 100% (instead of 50%) in the case of the former, or (ii) the fixed investment amount in the case of the latter(bkk Karari 15/7910). The following companies do not benefit from this deduction: companies operating in the finance, banking and insurance sectors; companies whose passive income (interest, dividends, capital income, etc.) comprises at least 25% of their total income; companies whose assets consist for 50% (or more) of shareholdings in affiliated enterprises; and companies that invest the increased cash capital in other companies or in land (up to the amount corresponding to the cash amount invested) Regional headquarters With effect from 9 August 2016, regional headquarters founded by non-residents in Turkey with the permission from the Ministry of Economy are exempt from corporate income tax, subject to two conditions: all expenses of the regional headquarters must be borne by foreign headquarters; and expenses borne by foreign headquarters must not be attributed to any company in Turkey, whether resident or non-resident. 20

23 CORPORATE TAXATION DOING BUSINESS IN TURKEY 2018 In addition, the salaries paid in foreign exchange to the personnel of the regional headquarters are also exempt from income tax as of 1 September Small and medium-sized enterprises Effective from 27 January 2017, an incentive has been introduced to encourage mergers between small and medium-sized enterprises. Under the incentive, income derived by SMEs engaged in manufacturing activities (and hold an industrial registry certificate) and are merged within the scope of the KVK will be subject to a reduced corporate income tax rate. The reduced rate will be applicable on the manufacturing income of the absorbing SME for 3 years. Income derived by absorbed SMEs will also benefit from the reduced rate until the date of merger. The Council of Ministers is authorized to determine the reduced rate, but has not exercised this authority yet Administration Taxable period The tax year is the calendar year (article 16 of the KVK). However, companies may apply for a tax year other than the calendar year Tax returns and assessment Corporate income tax returns must be filed by 25 April, or by the 25th day of the fourth month after the completion of the taxable period, with the tax office located in the district of the company s legal seat (articles 14 and 27 of the KVK). In the case of dividend distributions, a withholding tax return must be filed by the 23rd day of the month following the date of distribution Payment of tax Companies must make advance payments of corporate income tax for periods of 3 months. The rate of this payment is 20% (article 32 of the KVK). With effect from 1 January 2018, the applicable rate will be 22% for 3 years. Any withholding taxes (see section ) paid in a period are credited against the advance payments. If the annual sum of the prepaid tax exceeds the final tax liability, the difference is not refunded to the taxpayer but is carried forward to the next tax year as credit against the prepaid tax of that year or against other taxes due. Any excess remaining is then refunded to the taxpayer. If the final tax liability exceeds the prepaid tax, the tax due must be paid in April. Effective from 1 January 2018, a tax reduction will be applicable for compliant taxpayers (except finance and banking, insurance, reinsurance, pensions companies and pension investment funds) subject to certain conditions. Accordingly, 5% of the taxes calculated over annual corporate income tax returns will be deducted from the corporate income tax due. The reduction may not exceed TRY 1 million. The reduction is not applicable for taxpayers engaged in tax fraud within past 5 years (Law 6824) Rulings Taxpayers may request advance rulings regarding the tax treatment of a stated set of facts and circumstances (article 413 of the VUK). The tax authorities must return a written answer containing the tax administration s opinion. Such rulings granted by the tax authorities to a single resident or non-resident taxpayer with respect to a 21

24 DOING BUSINESS IN TURKEY 2018 CORPORATE TAXATION single transaction relating to all types of taxes or income has no binding effect on courts and tax authorities. However, no penalty and late payment interest can be charged if the taxpayer acts in accordance with the ruling. 2. Transactions between Resident Companies 2.1. Group treatment Group consolidation for tax purposes is not available. Each company is subject to tax individually. However, branches, agencies, sales departments, factories and other establishments of a company may not submit separate returns, even if they have independent accounting systems or have allocated capital of their own. Accounts of these units are consolidated and reported together in a single tax return Intercompany dividends Dividends distributed by resident companies to resident or non-resident corporate shareholders are not subject to further taxation in the hands of the shareholders (see section 1.1.). 3. Other Taxes on Income No other taxes are levied on corporate income in Turkey. 4. Taxes on Payroll 4.1. Payroll tax There are no payroll taxes imposed on companies Social security contributions Social security contributions are compulsory on the part of the employer and the employee. The employer s contributions, based on the employees gross wages (subject to minimum and maximum amounts), are as follows (article 81 of the SGK): accident and sickness insurance, 1% to 6.5%; health insurance, 7.5%; and disability, retirement and life insurance, 11% (13% in underground mines). A social security support premium of 23.5% must be paid by the employer for retired people who wish to continue receiving their pension and also be employed. In addition, employers must make a 2% unemployment insurance contribution, subject to minimum and maximum amounts (article 81 of the SGK). The contributions are deductible for corporate income tax purposes. For reduced contributions under incentive legislation, see section For the social security contributions payable by employees and individual entrepreneurs, see Individual Taxation section Taxes on Capital 5.1. Net worth tax There is no net worth tax. 22